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Income Tax Appellate Tribunal, DELHI BENCH ‘B’ : NEW DELHI
Before: SHRI A.T. VARKEY & SHRI PRASHANT MAHARISHI
IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH ‘B’ : NEW DELHI) BEFORE SHRI A.T. VARKEY, JUDICIAL MEMBER and SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER ITA No.3052/Del./2013 (ASSESSMENT YEAR : 2004-05) M/s. Excellent Land Developers Pvt. Ltd., vs. DCIT, Circle 11 (1), 7, South Patel Nagar, New Delhi. New Delhi. (PAN : AAACE1656M) (APPELLANT) (RESPONDENT) ASSESSEE BY : Shri Salil Aggarwal, Advocate & Shri Sahilesh Gupta, CA REVENUE BY : Shri B.R.R. Kumar, Senior DR O R D E R PER A.T. VARKEY, JUDICIAL MEMBER :
This is an appeal filed by the assessee against the order of the CIT (Appeals)-XIII, New Delhi dated 04.03.2013 for the assessment year 2004- 05. 2. Grounds of Appeal
No.1 to 3.1 challenges the reopening of the assessment on the ground that there was non-application of mind by the AO before reopening the assessment.
3. Brief facts of the case are that the assessee filed its return of income on 18.10.2004 showing a total loss of Rs.(-)32,424/-. The return was accompanied with final accounts and tax audit report u/s 44AB of the Income-tax Act, 1961 (hereinafter ‘the Act’). The return was processed u/s 143(1) of the Act. Later on, the case was reopened u/s 147 of the Act and notice u/s 148 was issued on the assessee on 31.03.2011. The assessee cooperated with the reassessment proceedings. The reasons for reopening are placed at page 13 of the paper book which reads as under :- “Reason for notice u/s 148 of the IT Act, 1961 A letter has been received from Investigation Wing Delhi that M/s. Excellent Land Developers Pvt. Ltd., PAN – (AAACE1656M) has received Rs.29,87,040/-. The assessment completed u/s 143(1) of the IT Act, 1961. The above discussed issues has not been brought to tax. Based on the above facts, I have reasons to believe that the income of the assessee chargeable to tax has escaped assessment because of the failure on part of the assessee to disclose its income fully and truly. If approved, a notice u/s 148 of IT Act may be issued to the assessee. Dated : 31.03.2011 sd/- (Manisha K. Beniwal) Dy. Commissioner of Income Tax, Circle 11 (1), New Delhi.”
Before we advert to the facts in this case, let us look into the well settled principles regarding reopening of assessment.
It is well settled in law that reasons, as recorded for reopening the reassessment, are to be examined on a standalone basis. Nothing can be added to the reasons so recorded, nor anything can be deleted from the reasons so recorded. The Hon’ble Bombay High Court, in the case of Hindustan Lever Ltd. vs. R.B. Wadkar [(2004) 268 ITR 332], has, inter alia, observed that "……….It is needless to mention that the reasons are required to be read as they were recorded by the AO. No substitution or deletion is permissible. No additions can be made to those reasons. No inference can be allowed to be drawn on the basis of reasons not recorded. It is for the AO to disclose and open his mind through the reasons recorded by him. He has to speak through the reasons." Their Lordships added that "The reasons recorded should be self-explanatory and should not keep the assessee guessing for reasons. Reasons provide link between conclusion and the evidence….". Therefore, the reasons are to be examined only on the basis of the reasons as recorded. 6. It is necessary to examine whether there was any “reason to believe” to have had such an exercise. The term “reason to believe” cannot be considered or evaluated in a water tight compartment and scope and applicability may vary from case to case, depending upon the facts and circumstances. The power under sections 147 / 148 comes into existence if he had reason to believe that income has escaped assessment. Formation of reason to believe that income escaped assessment has to be that of a prudent person. The reasons for such belief have to be recorded in writing on the basis of material in the possession of AO. While the words “reason to believe” are wide in their import, it cannot include a mere suspicion or ipse dixit of the AO. The belief of the AO should lead him to form an honest and reasonable opinion based on reasonable grounds. (ITO vs. Lakhmani Mewal Das – 103 ITR 437 at 448 (SC) and Navinchandra Mohanlal Parik vs. vs. WTO – 124 ITR 68). The Hon’ble Supreme Court endorsing the Full Bench decision of the Hon’ble Delhi High Court in CIT vs. Kelvinator of India Ltd. – 256 ITR 1 held in its order reported in 320 ITR 561, “…..that Assessing Officer has power to reopen, provided there is “tangible material” to come to the conclusion that there is escapement of income from assessment. Reasons must have link with the formation of belief.” Therefore, if the fresh tangible material which the AO has in his possession is relevant to have nexus to the formation of belief then, of course, the AO would have the necessary jurisdiction to take action under the Act. What is required to be examined is not the adequacy or sufficiency of the grounds but the existence of belief. In our view, all that one has to examine is that whether there was some material which, gave rise to prima facie view if that income has escaped assessment and the belief was formed in good faith or was it mere pretence for initiating action u/s 147/148 of the Act.
It is elementary that all receipts are not income as held by Hon’ble Supreme Court in the case of Parimisetti Seetharamamma vs. CIT reported in 57 ITR 532 (SC). The ld. AR has taken our attention to the order of the Hon’ble Delhi High Court in the case of Sarthak Securities Co. Pvt. Ltd. vs. ITO order dated 18.10.2010 wherein also the original assessment was made under section 143(1) as happened in the case of the assessee in the present case before us. The reasons recorded by the AO to reopen the case of Sarthak Securities Co. Pvt. Ltd. are as under :-
“M/s Sarthak Securities P Ltd AY 2003-04
19/3/2010 Information was received from the office of the Addl DIT (Investigation) Unit – V that M/s Sarthak Securities P Ltd had received bogus accommodation entries during the FY 2002-03 relevant to the AY 2003-04 as per details placed contra.
Beneficiary Beneficiary Beneficiary Value of Instru- Date on Name of Bank Branch Name Bank Branch Entry ment which A/c from of entry No. by entry holder of which giving which taken entry entry Bank entry giving given taken a/c Sarthak OBC Saket 2500000/- 17/12/02 Nishant SBBJ NRR Securities Finvest P. Ltd. Do Do Do 2500000/- 18/9/02 Dinanath SBP DG Luhhari Wal Spinning Mill Do Do Do 2500000/- 16/12/02 K.R. SBBJ NRR Fincap P Ltd. Do Do Do 300000/- 12/3/03 Division BOR Rohtak Trading Rd. P. Ltd.
According to the information received from the DIT (Inv) the accommodation entries are received as share application money or as unsecured loan. The assessee’s Balance sheet as on 31/3/2003 showed that there is introduction of share capital of Rs.284800/- and share premium of Rs.865000/-.
In this case return of income for the AY 2003-04 was filed on declaring income of Rs.15360/- and as per records asstt has not been completed u/s 143(3) of the I.T. Act. WP(C) No.6087/2010 Page 6 of 15 As the assessee had received bogus accommodation entry of Rs.1050000/- during the AY 2003-04, I have reason to believe that income chargeable to tax has escaped assessment.”
While deciding that matter (Sarthak Securities Ltd.), their Lordships looked into the following cases and a passage from N.D. Bhatt, Inspecting Assistant Commissioner, Income Tax & Another. v. I.B.M. World Trade Corporation, [1995] 216 ITR 811 (Bombay) : “It is also well-settled that the reasons for reopening are required to be recorded by the assessing authority before issuing any notice under section 148 by virtue of the provisions of section 148(2) at the relevant time. Only the reason so recorded can be looked at for sustaining or setting aside a notice issued under section 148. In the case of Equitable Investment Co. (P.) Ltd. vs. ITO [1988] 174 ITR 714, a Division Bench of the Calcutta High Court has held that where a notice issued under section 148 of the Income-tax Act, 1961, after obtaining the sanction of the Commissioner of Income-tax is challenged, the only document to be looked into for determining the validity of the notice is the report on the basis of which the sanction of the Commissioner of Income-tax has been obtained. The Income-tax Department cannot rely on any other material apart from the report.”
In Hindustan Lever Ltd. v. R.B. Wadkar, [2004] 268 ITR 332 (Bom), a Division Bench has opined thus:- “.... the reasons are required to be read as they were recorded by the Assessing Officer. No substitution or deletion is permissible. No additions can be made to those reasons. No inference can be allowed to be drawn based on reasons not recorded. It is for the Assessing Officer to disclose and open his mind through reasons recorded by him. He has to speak through his reasons. It is for the Assessing Officer to reach to the conclusion as to whether there was failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment for the concerned assessment year. It is for the Assessing Officer to form his opinion. It is for him to put his opinion on record in black and white. The reasons recorded should be clear and unambiguous and should not suffer from any vagueness. The reasons recorded must disclose his mind. Reasons are the manifestation of mind of the Assessing Officer. The reasons recorded should be self-explanatory and should not keep the assessee guessing for the reasons. Reasons provide the link between conclusion and evidence. The reasons recorded must be based on evidence. The Assessing Officer, in the event of challenge to the reasons, must be able to justify the same based on material available on record. He must disclose in the reasons as to which fact or material was not disclosed by the assessee fully and truly necessary for assessment of that assessment year, so as to establish the vital link between the reasons and evidence. That vital link is the safeguard against arbitrary reopening of the concluded assessment. The reasons recorded by the Assessing Officer cannot be supplemented by filing an affidavit or making an oral submission, otherwise, the reasons which were lacking in the material particulars would get supplemented, by the time the matter reaches to the court, on the strength of affidavit or oral submissions advanced.” [underlining is ours] 10. In Assistant Commissioner of Income Tax v. Rajesh Jhaveri Stock Brokers P. Ltd, [2007] 291 ITR 500 (SC), it has been ruled thus :-
“Section 147authorises and permits the Assessing Officer to assess or reassess income chargeable to tax if he has reason to believe that income for any assessment year has escaped assessment. The word “reason” in the phrase “reason to believe” would mean cause or justification. If the Assessing Officer has cause or justification to know or suppose that income had escaped assessment, it can be said to have reason to believe that an income had escaped assessment. The expression cannot be read to mean that the Assessing Officer should have finally ascertained the fact by legal evidence or conclusion. The function of the Assessing Officer is to administer the statute with solicitude for the public exchequer with an inbuilt idea of fairness to taxpayers. As observed by the Supreme Court in Central Provinces Manganese Ore Co. Ltd. v. ITO, [1991] 191 ITR 662, for initiation of action under Section 147(a) (as the provision stood at the relevant time) fulfillment of the two requisite conditions in that regard is essential. At that stage, the final outcome of the proceeding is not relevant. In other words, at the initiation stage, what is required is “reason to believe”, but not the established fact of escapement of income. At the stage of issue of notice, the only question is whether there was relevant material on which a reasonable person could have formed a requisite belief. Whether the materials would conclusively prove the escapement is not the concern at that stage. This is so because the formation of belief by the Assessing Officer is within the realm of subjective satisfaction.” [Emphasis supplied]
Their Lordships further referred in Sarthak Securities Limited the decision of Delhi High Court in (The Commissioner of Income Tax III v. SFIL Stock Broking Ltd.) decided on 27th April, 2010 wherein the Division Bench was dealing with the validity of the proceedings under Section 147 of the Act. The Bench reproduced the initial issuance of notice and thereafter referred to the reasons for issue of notice under Section 148 which was provided to the assessee. Thereafter, the Bench referred to the decisions in CIT v. Atul Jain, 299 ITR 383 (Del), Rajesh Jhaveri Stock Brokers Pvt. Ltd (supra), Jay Bharat Maruti Ltd. v. CIT, 223 CTR 269 (Del) and CIT v. Batra Bhatta Company, 174 Taxman 444 (Del) and eventually held thus:- “9. In the present case, we find that the first sentence of the so-called reasons recorded by the Assessing Officer is mere information received from the Deputy Director of Income Tax (Investigation). The second sentence is a direction given by the very same Deputy Director of Income Tax (Investigation) to issue a notice under Section 148 and the third sentence again comprises of a direction given by the Additional Commissioner of Income Tax to initiate proceedings under Section 148 in respect of cases pertaining to the relevant ward. These three
sentence are followed by the following sentence, which is the concluding portion of the so-called reasons:- “Thus, I have sufficient information in my possession to issue notice u/s 148 in the case of M/s SFIL Stock Broking Ltd. on the basis of reasons recorded as above.”
From the above, it is clear that the Assessing Officer referred to the information and the two directions as ‘reasons' on the basis of which he was proceeding to issue notice under Section 148. We are afraid that these cannot be the reasons for proceeding under Section 147/148 of the said Act. The first part is only an information and the second and the third parts of the beginning paragraph of the so-called reasons are mere directions. From the so-called reasons, it is not at all discernible as to whether the Assessing Officer had applied his mind to the information and independently arrived at a belief that, on the basis of the material which he had before him, income had escaped assessment. Consequently, we find that the Tribunal has arrived at the correct conclusion on facts. The law is well settled. There is no substantial question of law which arises for our consideration.” [Emphasis is ours]
Their Lordships in M/s. Sarthak Securities Ltd. observed that on a perusal of the aforesaid decisions, it is graphically clear that once the ingredients of Section 147 are fulfilled, the assessing officer is competent in law to initiate the proceedings under Section 147. To put it differently, the conditions precedent as engrafted in the said provision are to be satisfied.
Further, their Lordships took note of authority laid in GNK Driveshafts (India) Ltd. v. Income Tax Officer and Others, (2003) 179 C54 (SC) 11wherein their Lordships of the Apex Court have held thus:-
“5. We see no justifiable reason to interfere with the order under challenge. However, we clarify that when a notice under Section 148 of the Income Tax Act is issued, the proper course of action for the notice is to file return and if he so desires, to seek reasons for issuing notices. The assessing officer is bound to furnish reasons within a reasonable time. On receipt of reasons, the notice is entitled to file objections to issuance of notice and the assessing officer is bound to dispose of the same by passing a speaking order. In the instant case, as the reasons have been disclosed in these proceedings, the assessing officer has to dispose of the objections, if filed, by passing a speaking order, before proceeding with the assessment in respect of the abovesaid five assessment years.”
In Lovely Exports (P) Ltd.(supra), the Apex Court held thus:-
“2. Can the amount of share money be regarded as undisclosed income under Section 68 of Income Tax Act, 1961? We find no merit in this Special Leave Petition for the simple reason that if the share application money is received by the assessee company from alleged bogus shareholders, whose names are given to the assessing officer, then the department is free to proceed to reopen their individual assessments in accordance with law. Hence, we find no infirmity with the impugned judgment.”
Further, after taking note of the aforesaid precedents, the Hon’ble Delhi High Court, after going through the provisions of section 147 and 148 of the Act, quashed the initiation of proceedings u/s 147/148 of the Act in M/s. Sarthak Securities Ltd on the reason recorded by the AO which is reproduced above is as under :- “23. The obtaining factual matrix has to be tested on the anvil of the aforesaid pronouncement of law. In the case at hand, as is evincible, the assessing officer was aware of the existence of four companies with whom the assessee had entered into transaction. Both the orders clearly exposit that the assessing officer was made aware of the situation by the investigation wing and there is no mention that these companies are fictitious companies. Neither the reasons in the initial notice nor the communication providing reasons remotely indicate independent application of mind. True it is, at that stage, it is not necessary to have the established fact of escapement of income but what is necessary is that there is relevant material on which a reasonable person could have formed the requisite belief. To elaborate, the conclusive proof is not germane at this stage but the formation of belief must be on the base or foundation or platform of prudence which a reasonable person is required to apply. As is manifest from the perusal of the supply of reasons and the order of rejection of objections, the names of the companies were available with the authority. Their existence is not disputed. What is mentioned is that these companies were used as conduits. In that view of the matter, the principle laid down in Lovely Exports (P) Ltd.(supra) gets squarely attracted. The same has not been referred to while passing the order of rejection. The assessee in his objections had clearly stated that the companies had bank accounts and payments were made to the assessee company through banking channel. The identity of the companies was not disputed. Under these circumstances, it would not be appropriate to require the assessee to go through the entire gamut of proceedings. It is totally unwarranted.”
We take note that the reasons recorded in M/s. Sarthak Securities Ltd.
and compare the same with assessee’s case, we find that the reasons recorded in M/s. Sarthak Securities Ltd. was on a better footing than that of the reasons recorded by the AO in order to reopen the assessment in assessee’s case. With this observation, let us examine the reasons recorded by the AO dated 31.03.2011 on a standalone basis, we take note that all that the reasons recorded for reopening indicate is that assessee received Rs.29,87,040/-. It is elementary that all receipts are not income. There is no whisper in the reasons recorded that the assessee has routed his money through any fictitious company. Merely stating that Rs.29,87,040/- has been received by assessee cannot by any stretch of imagination satisfy the condition precedent as laid by the Hon’ble Apex Court and Hon’ble jurisdictional High Court in a plethora of cases as cited above. The case of the assessee is that on a perusal of the balance sheet of the company which was filed along with the return of income it was clearly reflected that Rs.29,87,040/- was received by the assessee company on sale of shares of M/s. Shiv Shakti Town Developers Limited which were sold through M/s. Sino Credit and Leasing Ltd. to M/s. York Leasing and it was duly disclosed as sale consideration. Thus, we find that there is no new material on record to entertain a belief that assessee’s own money was routed through M/s. Sino Credit and Leasing Ltd. as an accommodation entry. The fact of receiving the said amount as sales consideration was before the AO during the original assessment which cannot be termed as fresh tangible material for the assessment year under consideration, when the same receipt was disclosed in the balance sheet of the assessee which was filed along with ROI. Taking a case for scrutiny u/s 143(3) is the department’s choice and if an AO does not do his job at the original assessment then it cannot be a justification for AO to reopen, which will be giving premium to an AO who failed to do his job properly, which cannot be allowed. Further, the reasons recorded for reopening the assessment do not make out a case that the assessee had suppressed any material factor or misguided the AO during original assessment though u/s 143(1). As we do not have the liberty to examine these reasons on the basis of any other material or fact, other than the facts set out in the reasons so recorded, it is not open to us to deal with any other material when we examine the reasons on a standalone basis to look in to the question as to whether the income has escaped assessment. The Assessing Officer has made a bald statement that income has escaped assessment of income because of the failure on apart of the assessee to disclose its income fully and truly without even going through the original assessment u/s 143(1) of the Act and overlooks the fact that the assessee had filed the audited balance sheet wherein the sale consideration of shares of Rs.29,87,040/- was reflected. So, what the AO has done was once he got a letter from Investigation wing that some amount has been received by the assessee, the AO immediately resorted to reopening u/s 147 which is not allowed by law. Of course, it may be desirable, from the point of view of revenue authorities, to examine the matter in detail, but then reassessment proceedings cannot be resorted to only to examine the facts of a case, no matter how desirable that be, unless there is a reason to believe, rather than suspect, that an income has escaped assessment.
Therefore, we find that the AO in a mechanical manner and on assumption and presumption and without application of mind has initiated the proceedings u/s 147 of the Act on mere suspicion and non-existent belief and fact which having no nexus live link with the formation of link for formation of belief of escapement of income by the AO is absent in this case. Therefore, we find force in the contention of the ld. AR that the AO has mechanically, without application of mind, reopened the assessment u/s 147/148 of the Act, therefore, the same needs to be quashed and we order accordingly.
Since we have allowed the legal grounds of initiation of reopening itself and the AO lacks jurisdiction to proceed with the reassessment, we are not inclined to adjudicate the other grounds since it is only academic. In the result, the appeal of the assessee is allowed. Order pronounced in open court on this 17th day of March, 2016.